Adcore Inc. (ADCO) Earnings Call Transcript & Summary

Okay. Great. Let's go straight ahead. So great to have you today. My name is Kovi Fine, I'm a General Manager here at Adcore. Today, we're going to be hearing from Omri Brill, CEO of Adcore and Yatir Sadot, CFO of Adcore. Just to speak about the agenda, what we'll be covering today, starting off with some forward-looking statements. The CEO opening remarks followed by CFO financial highlights and finishing off with a brief Q&A. Please take a minute or 2 just to review you the forward-looking statements and information. Great. Thank you. And with that, I'm going to hand it over to Omri Brill, CEO of Adcore.

Great. So good morning, everyone, and thank you, Kovi, for the intro, and we welcome everyone to the company Q2 2023 earnings call, and we have a stronger report to present to you today, which obviously, we are very proud of the performance of the company in Q2. And let me share my slides so we can get started. So as I mentioned, Q2 2023 was a very strong quarter for us. It has marked a significant achievement and a positive growth for the company, and we're very proud that the resources that we've been able to get. But actually, in this earning call, before we dive deeper into the Q2 numbers, I would like to take this opportunity and basically discuss more high-level strategic opportunities for the company as well on focusing on the long-term vision of the company, which obviously can lead us for -- on the path of continued success. So usually, we dive straight to the numbers, but we want to make this call a bit different. And talk a bit in the beginning, high-level strategy in the way the company is based in what is it for the company, what the future holds for the company moving forward. So actually, I would like to start with like some very interesting graphs that cover industry changes that we see in our industry, online advertising. And the first graph that I would like to share is -- basically demonstrates our Google -- both Google and Meta and basically losing dominance of market share within online advertising. And this graph actually covers everything from 2008 to 2024. And blue is the -- blue portion of the graph is Meta and Google share. And we can clearly see that it's peaked around 2016, 2017. But since it's peaked, that was the top of their market share, almost 50%, and then it declined -- starting to decline. And actually, what we can also see is the rise of, let's say, competitor channels or competitor Ad networks that weren't existent back then, competitors like TikTok, like Amazon advertising like Apple advertising, for example, and many, many others. So the market becoming more complex, and that's not necessarily best thing for a company like Adcore. And the same story exactly that we see with Google and Meta, we see with regards to North America share with online advertising. So this graph actually going back to 2000 until 2024. And again, North America, that's the blue portion of the graph. And we can clearly see that 2000 where it was still the early days of the Internet, North America was representing 75% of online advertising globally, then obviously fast forward, now we are talking about maybe 50%. So again, these emerging markets, emerging countries and basically the market become more and more diverse. Yet again, is not necessarily a best thing for Adcore. So it's the same story, whether we see it geographically or we see it with regards to ad network, more complex market, more competitors and basically somebody that now is doing online advertising, his life is not as easy as it used to be, let's say, 10 years ago. And actually, this graph actually tells the story quite well. So if in 2007, somebody would come to us and say, I would like to do online advertising. So probably we can recommend it to do Google, which was back then maybe like 50% of the market share of online advertising, and it can maybe only focus on U.S., which was still quite a large market by itself. And that was fine. So life was easy, he can do it by himself basically. And even in 2017, 10 years after that, still, maybe not only Google, maybe Google and Facebook back then, but maybe it's enough. And now fast forward to 2023, we have so many channels, so many markets. And basically, it's very complex for an online advertiser to have relationship with every single channel in every single market. So ideally, if there is somebody that sits in the middle, like a getaway, what Adcore is doing that can be a very good news for them. Actually, it's also good news to the different channels as well. So only for the channels, the life is becoming more complex and the channel's ability to operate in any single market and every relationship with every single client is questionable. And that's why Adcore now owns very strategic partnership with many channels, whether it's Microsoft or Criteo and many other as well because they need somebody, a company like Adcore to sit in the middle and basically have the relationship with their customers from one end and with the channel from the other end. Obviously, they have the technology and able to scale up the activity of everyone. Another thing that I would like to cover is all the companies are accelerating. So everything it took us a long time to do before. Now it's taken us a very short period of time relatively. And basically, when I founded this business in 2006, we were still one office, not a lot of people in Tel Aviv, Israel. And it took us more than a decade until 2017 until we opened the first outpost outside of Tel Aviv, which was Melbourne, Australia. And then fast forward, after the company became a public company, geographic expression was a major effort of the company and what took us a decade between 2006 and 2017, literally, it took us 3 years to open another 4 different offices. So after we went public, we opened a Hong Kong subsidiary. We opened the Shanghai subsidiary. Obviously, the Canadian Adcore Inc., which is the public company. And in 2022, we also opened a U.S. subsidiary. So whatever the company used to do for a long period of time, now we can do much faster. And actually, we are quite pleased with the current geographical presence of the company. So we don't accept another, let's say, new outposts in the near future. We think that we should focus on what we have right now and making the most out of it. And the same story exactly that we see with your geographical expansion. Actually, it's funny, but we can see it with tech development as well. So in 2006 when the company just started, we launched our first version of our app ADCORE Views for campaign creation and optimization. And it took us more than a decade until 2017 to launch our second half, which is Feeditor for feed optimization. And then, let's say, after going public, what we can see is that, again, it took us like 3 hours to launch another 4 different apps. Obviously, we have Effortless Marketing. This is our Shopify app and e-commerce app. In 2022, we also launched Alerter, which is account monitoring app with [indiscernible], which is a campaign performance app. And in 2023, which is relatively new. Now we launched Media Blast, which is account creation and account founding up. So whatever took us a long time before we can do much faster now, and this gives us a lot of confidence in the company's ability now to grow much quicker and basically to scale up everything that we are doing. Another interesting thing that the company is doing that we are implementing vertical integration strategy. So if we started the company and knew how to provide solution -- technology solution around feed creation and optimization and campaign creation and optimization, we decided that actually the media journey of a typical customer was -- don't really start with the feed creation or optimization or even campaign creation. Actually starts way before with, let's say, account creation, account founding, maybe media research and planning. And then after the campaign is created, you would need monitoring app, you would need analytical up, you would need financial -- financing and budget management app. So basically, the company decided we would like to bring in every single touch point across, let's say, the customer media journey and basically supply value over there. And this strategy is exactly proving itself. So fast forward, we already have under the Adcore Marketing Cloud, 7 different apps, Media Blast, which is the newest addition to the cloud. It basically allows clients to do it yourself, account opening an account founding tool aiming more for, I would say, small business type and small agencies type of businesses, mainly in emerging markets, but not only there. Very interesting app that we started to see a lot of, let's say, traction over there and it's already generated their revenue for us, Effortless Marketing, account creation app, both for Shopify and e-commerce, Feeditor one of the flagship app for feed optimization views, the first app that we developed for campaign creation, Alerter account monitoring. And so we're going to have the focus component. So it's going to also have predictive analytical abilities, Semdoc, which is the account, I would say, analytical tool and [indiscernible], which is basically campaign performance app that we developed. So again every single touch point in the user journey now we have a solution to provide and that gives us a lot of fair strength and a lot of power. And that brings me to the company updated vision, which is basically serving as a gateway to enable multiregional and multichannel accessibility connecting pieces and customer effortlessly. So basically, the fact that the company is able to be in so many different regional locations and having a different, I would say, app and technology solution for every single touch point. That gives us a lot of power and basically ability to have like all-in-one solution for customer, and that's also give us a lot of cross-sell and upsell opportunity for every client that it will bring. So we can bring, for example, maybe clients for, I don't know, the account creation and account founding funding app. And then, obviously, we can upskill them to another app or maybe even sell them some marketing solutions or services that we can provide them. So again, the more the solutions that we have, the more services that we have, the more technology and applications that we have, and there's more upsell and capability for the company. And that's actually, we already started to see this power within the company results. Q1 was very strong. Q2 2023 is yet another very strong report. And bear in mind that historically, the first part of the year in online advertising, is just, let's say, warm up for the second part of the year because Q3 and Q4 is supposed to be even stronger historically, and the company believes that 2023 has the potential to become a monster year for the company. So let's dive into some of the Q2 2023 report highlights. And let's start with top line, middle line number. So as we can see, Q2 was a very strong report for us. Top line revenue was CAD 6.9 million that represented 33% year-over-year growth compared to the $5.2 million that we have in the previous year. And gross profit, we saw a massive increase of 41% year-over-year to $3 million this year compared to $2.1 million in 2022. So again, a very strong quarter. And as you can see from the graph,3 and Q4, historically are supposed to be even stronger quarters for us. So if we started the first half of the year so strong, we have a lot to expect from the second part of the year. If we talk about quality growth KPIs, and we mentioned them across the previous earning calls, then these few KPIs that the company like to look at. The first one, I would say, is gross margin. And if you remember, the company is happy as long as it's within the 40% to 50% range and Q2 2023 was 43%. So it's exactly where the company anticipated to be and we are very happy for it, and yet again, 41% in gross profit growth that's very impressive as well. And again, another, let's say, quality KPI for us is the revenue we can generate from North America, which is a strategic market for us. And over there, we see the same trend of growth like it continues. So 16% year-over-year growth in North America, and we believe we can even be a bit more aggressive over there in the second part of the year. If we discussed Amphy and we discussed a bit the monthly average burn rate for Amphy. So we can clearly see it went down a lot. So for between, let's say, Q1 2020, which was $81,000, now we are sitting at $66,000 in Q2, and we expect to see this trend continue well into Q3 and Q4 as well. So we are doing a lot of effort to be a more efficient operation and Amphy is already bearing fruit. The peak was $120,000 basically monthly burn that we had in Q1 2022. And since then, we managed to cut it in more than 50%, which is impressive. And on the flip side, on the positive side, you can see the same trends that we see on Amphy, let's say site and blog visitor is continuing. So Q1, sorry, we saw [48,000] average monthly visitors, and we almost doubled it up now in Q2 2023 to almost 100,000, and we anticipate that Q3, this trend is going to continue as well. So again, we are burning less cash and we see like a more, I would say, interest within the Amphy platform, which is, I think, is a positive sign for us. So just to ramp up the highlights of the Q2 numbers. Revenue grew 33% year-over-year. Gross profit, 41% year-over-year growth. EMEA revenue grew by an impressive 50% year-over-year. North America revenue grew 16% year-over-year. And even APAC that, if you remember, was declined actually in 2022. It's now back on a growth trend and basically growing 29%. So we see growth -- grow across the board in every single region that the company is operating. Talk a bit about the share price and basically -- so the current share price is around $0.20. And obviously, if you look at comparable, we believe that share is fairly undervalued. And the company, that's why we continue to buy shares as well until we're going to see a very strong uplift in the stock. And NCIB, we purchased in Q2, almost 300,000 shares for cancellation and the company invested in this buyback plan, almost CAD 67,000. And obviously, we're going to continue to do so as long as we think that the share price is undervalued. So in the beginning of the year, we talk about the company, I would say, high level targets for 2023. So the first target that we mentioned is maintain strong balance sheet. We focus on increasing cash reserve. So I think like Yatir touch it a bit on his report on his data, but cash flow is improving a lot, operational profit and loss is improving, and we think -- we definitely think that we are on the right trend. That the company expects for sure, Q4 2023 to be a positive quarter, positive cash flow and operational profit, but hopefully, it can happen even earlier in Q3, but stay tuned. So I think like over there, we definitely see a positive momentum. Obviously, top line bottom line, but also bottom line numbers are improving. Second KPI, our target is to keep the gross margin within the 40% to 50% range, so yet another check, 43%. Third goal is to achieve dual-digit growth in revenue, gross profit and operational profit. So 33% growth in revenue, 41% growth in gross profit and operational profit improved more than 30%. So I think like loss improved. So I see like we are definitely in the right direction and expand our global footprint in North America. Yet again, we see this region is continuing to grow year-over-year and also quarter-over-quarter. Number five is trending the strategic partnership that will drive mutual growth and market share. So the company recently was named as Microsoft Advertising Channel Partner of the year and obviously channel partner in EMEA. And then we recently also announced a partnership that we have with Amazon Advertising and also as the company become a preferred partner of Criteo in Israel and hopefully, it's going to be -- follow-up with other markets as well. So we are definitely moving in the right direction and obviously invest in R&D. And again, you see this a lot going on, Boston office have a brand-new brand site, website with more focus on work-related learning courses and obviously, with AMC that we recently launched another the Media Blast app. So yet again, we are moving actually and accelerating our R&D efforts. Okay. I think that was my remarks for today. So we cover the last. We talk about high-level strategy changes that we've seen within our industry that obviously affect the company and actually represent a massive opportunity for us to act as a gateway in the middle. The fact that the company is accelerating. Whatever took us a decade to achieve. Now we can literally achieve it within 1 year or 3 years. So that's amazing. That means we can achieve much more and grow much faster. And we already started to see that within the results. So the company has a more holistic approach. We understand what is our value proposition within the market. And basically, this is starting to bear fruit. And I think the reports will speak for themselves, and I think like next is Yatir.

Thank you, Omri, and good morning. I will share my screen here. I would like to present a clear and comprehensive overview of our second quarter financial results, highlighting both GAAP and non-GAAP metrics, all denominated in Canadian dollars. Despite facing a difficult business environment, our team performed well in the second quarter, maintaining the same positive momentum we experienced in the first quarter this year. As I mentioned in the last call, since mid-2021, we've strategically focused on higher-margin revenue streams and building relationship with scalable, resilient clients. This approach has enhanced our business sustainability and improved our long-term profitability. Now let's dive into details. For the 3 months ended June 30, 2023, we delivered revenue of $6.9 million compared to $5.2 million year-over-year, an increase of $1.7 million or 33%. We are delighted to have achieved the upper range of our projections for the second quarter. Gross profit was $3 million compared to $2.1 million, an increase of $900,000 or 41%. This quarter, gross margin was 43% compared to 40% in the same period last year. We kept the target range of gross profit between 40% and 45%. And we are feeling very comfortable, as Omri mentioned before. As for operational expenses, R&D expenses were $0.4 million or 6% of revenues compared to $0.4 million or 8% year-over-year. Sales and marketing and general and administrative expenses were $3 million or 43% of revenues compared to $2.3 million or 44% of revenues year-over-year. SG&A expenses increased mainly due to partnership expansion and marketing expenses. Operating loss was $0.4 million compared to an operating loss of $0.6 million. This decrease in loss was mainly driven by the increase in revenues. Net loss was $0.5 million compared to a loss of $1.2 million year-over-year. This slide, we will discuss the total revenue. And as you can see on the left wing of the slide, we went up by 33% year-over-year in the second quarter of 2023 compared to the same period last year. And on the right wing of this slide, you can see the growth for the first 6 months of this year by 38% compared to the same period last year. As for geo revenue breakdown. As you can see, EMEA and APAC showed the most growth year-over-year. EMEA grew by 50%. APAC grew by 29% and North America grew by 16%. We continue to observe strong momentum and notable expansion in our partners' plan. Now let's discuss about the net cash used in operating activities. In the 3 months ending June 30, 2023, the company utilized $0.4 million in net cash flow operating activities only, a notable decrease from the 1.3 million used during the same period last year. This positive shift can be attributed to the team's diligent efforts in one, enhancing our collections from clients and number two, reducing vendor payments and securing improved terms with existing suppliers. In terms of financial position, we ended Q2 with cash and cash equivalents of $6.2 million as of June 30, 2023, compared to $8.8 million at December 31, 2022. Total working capital of $7.8 million compared to $9.2 million at December 31, 2022, a decrease of $1.4 million or 16%. The decrease in cash is mainly attributed to, first of all, media payments related to the fourth quarter of 2022, purchasing shares through the NCIB plan, as Omri mentioned before. The intensive investment in Amphy and expanding our partnerships plan. We anticipate reducing our cash expenditure in operating activities and increasing our cash and cash equivalents in the latter half of 2023 compared to 2022. This expectation is based on increased demand for the company's products and enhanced profitability. We still hold debt free position. And the company continues to be debt-free for the future. Adjusted EBITDA, our quarterly non-GAAP results reflect adjustments for the following items: Depreciation and amortization totaled $201,000. Share-based payment totaled $126,000, other nonoperational items, $191,000. And for the 3 months ended June 30, 2023, adjusted EBITDA was $112,000 compared to a loss of $30,000 for the same period last year. Adjusted EBITDA for the asset activity was $337,000 in the same period. Thank you, everyone. And with that, I will turn the call back to Kovi.

Thank you, Aero. We're now going to be heading into some Q&A. These are some presenting questions, and I will go ahead and read them. I will read them to Mr. Omri Brill, then he will take it from there. So starting #1, does the company expect to be profitable by Q4? If not, when?

Yes. So I also already mentioned it in my opening remarks that the short answer is yes. And hopefully, we can achieve it even before that in Q3. But I think that we can definitely see the trend. The company, let's say, loss is nearing or shrinking and the company has become more efficient and more profitable. And with like the historical momentum that online advertising in the second part of the year, then for sure, we believe we can be profitable in Q4 and hopefully even before.

Okay. Great. Do you anticipate any M&A activity in 2023 to spur growth?

So the market condition is still very much challenging. So I would say never say never, but if we're talking about M&A that we can use maybe some of our shares as capital that maybe yes, but this means that we need now to allocate our own cash flow is, and maybe I think it's too early. So it depends. That's the honest question.

If the economy heads towards a recession, how big of an impact will this have on your business?

It's a good question. We are in recession, I would say, for the past year half now, and we're still waiting for it in a sense. So hopefully, it's not going to come. But I think like upper until now, obviously, with COVID and post-COVID effect. And obviously, the interest rate is going up in -- everywhere in the world. So there's obviously a lot of, I would say, changes within the economy and market conditions are anything but normal. But I would say, even under this type of condition, the company is being able to outperform our original expectation and so a very strong start of the year of 2023. So I would say, for now, we don't anticipate any, I would say, any negative business condition more than what we see up until now, hopefully, we can see some positive business conditions moving forward. But with the current business conditions, the company expects to have a very strong second part of the year as well. That's my -- that's the company's estimation.

Are you planning to expand to any new geographic areas?

It's a good question. I think like I already touched it a bit in my remarks that we are happy with our own geo presence, like we are -- literally for a company of Adcore size are very well spread. We're in Tel Aviv, Israel, that's the headquarters. Obviously, Canada, which is where we are listed as well. We have another branch now in the U.S. as well. Melbourne, Australia, 2 offices in Greater China region. So I think that we might as well focus on what we have and making the most out of it. So I don't see us opening any new office anytime soon. But again, that's for 2023.

Great. The next question is, will you maximize your NCIB allowance?

Yatir, maybe you would like to answer this one.

Yes, I will take it. We are already maximizing the program's potential. So this is a pretty straightforward answer.

Okay. Will GM continue to improve? And what's the long-term target?

Yes. I think like we mentioned it before, like we are happy as long as we see the gross margin within the 40% to 50%. In Q2, it was 43%. So I think like, yes, we feel comfortable with where we are today. Obviously, if it can be more even nearing 50%, this could be even better for the company. But as long that we are within this range, we are happy with the results.

EMEA growth was very strong. Do you expect this to continue for the year?

It's a good question. EMEA is outperforming in terms of market for the past, I would say, 12 months or so, which is encouraging. But I think like the company is lucky enough to be very well spread. And I think like a revenue coming, I think, almost [38% or 37%] from APAC and EMEA and then the rest coming from North America. So even if one market for whatever reason it started to slow down, we still have 2 other markets that can take its place. So I think like, yes, EMEA is doing great. We expect it to continue doing good. But even if EMEA for whatever reason will start to slow down, we are still lucky to have APAC in North America to take its place as the leading host.

Great. What was the biggest driver in the 70% reduction in cash burn for the quarter?

Yatir?

Yes, I will take it. So the primary reason for the cash reduction is due to media payments made in early Q1 2023. Media payments related to the activity in the fourth quarter of 2022. Other explanations related, as I mentioned before, to the purchasing shares under the NCIB, the investment in Amphy and of course, the extending -- the extension of our partnerships plan.

Yes. To what Yatir just said that obviously, in a sense, the cash that we are losing in Q1, which is related to Q4 the last year, we should be earn it back in the Q4 of this year in a sense.

What was Amphy's contribution and impact in the quarter.

Yatir?

Yes. Amphy contributed like $21,000 to the company's total revenue this quarter and the company invested $236,000 on Amphy's project. So this is on the level of the revenue and on the level of the expenses.

I would add that also for Amphy, historically, the quarter 4 is a strong quarter as well. So even for Amphy the second part of the year should look much better. And we are in the projection of lowering the bandwidth over there as well. So more revenue and less bandwidth is obviously good news for Amphy and for the company as well.

How should investors evaluate the company's result throughout the year given industry seasonality?

So we talk about seasonality a lot. Like in a sense, what you can think on online advertising, that literally, the year is building up quarter-over-quarter. So historically, Q1 is the slowest month of the year. People spend all the money during the holiday season. It's winter. There's not a lot of activity going on. So there's not a lot of spending. So that's historically the slowest quarter. And then Q2 started to pick up. It's already spring. So we have the spring break and people just starting home renovation and maybe some real estate-related activities. So we see more momentum in Q2. Q3 is even strong. It's already summer. So we have all the summer breaks, travel related spend. There is more activity, people are outside. People are enjoying themselves. So obviously, Q3 is even stronger. And then to finish the year with the bang like Q4 is obviously the stronger month of the year with holiday season and all the holiday related expenses. So Q1, Q2, Q3, Q4, very simple.

Great. And that completes our Q&A section. So thank you, everyone, who sent in your questions. And that will conclude today's call. So thank you very much for joining and have a great day.

Great. Thank you, guys. Thanks, Kovi, for the hosting and thanks, Yatir for your remarks on the financial report. And again, thanks for everybody who joined us today.